The Union Budget to be presented this time is probably the most important one in recent history simply because expectations are high as we may have a reached a point of no return with few growth impulses in the economy. The budget has just become the next milestone after a series of credit policies with a lot of direction being expected from an otherwise routine affair. The Budget is really a basic statement of account which involves some tinkering in places to ensure that overall borrowings are within the fiscal limits. It is also a challenge for the government beyond these excessive expectations as the fiscal numbers have to add up.
The expectations from the Union Budget for this year are many. The economy as a whole apparently appears to be doing well going by the GDP growth for FY16, which however is not convincing when these figures are broken down. That's so because investment has fallen and corporate results have been disappointing for three quarters this year. This is why it is felt that the government has to take on the role of engine for investment so that economic growth can take off.
Practically speaking total capex of the government for this year was Rs 2.41 lakh crore of which Rs 0.95 lakh crore was for defence. Therefore a number of approximately Rs 1.3 lakh crore is just 1% of GDP and even if upped by Rs 20,000 cr would be small to directly affect growth. However, once the government starts spending it can be a driver of private investment too. Hence, the government has to increase investment to placate the market.
Also a lot has been said about public sectors banks’ NPAs. With government being the owner it has to provide support both through funding as well as appropriate policy. The former would have to come from the Budget while the latter will be in terms of putting forth an approach to disinvesting its stake. This issue has been in the discussion room for quite some time but the government has still to take a decision. There has been a modicum of hesitancy to either lower the stake to 51% or merge the weaker ones with the strong banks. This will be a hard decision to take but some mention on the approach would be expected.
The fiscal arithmetic is also interesting. First the government has to take a call on the fiscal deficit number. Will it be 3.9% of GDP or lower at 3.5% or somewhere in between? Somehow we have gotten into a trap where we have to balance economic compulsions with the expectations of global rating agencies. For FY16 we had decided to lower the deficit by just 0.2% of GDP instead of 0.5%, thus changing the goal post. But it was to be a one-off deviation. Will this continue for two years now? That's the question in every ones’ mind.
The second conundrum relates to the behaviour of absolute GDP as the math involves looking at the deficit which is the numerator relative to the denominator. The latter is based on nominal growth in GDP. In the past it was assumed growth would be between 12-13%. But last year given the phenomenon of declining inflation the assumption made for GDP growth was 11.5%. But based on the governments expectations this would be not more than 9% in FY16. For FY17 it won't be too different given low commodity prices. To maintain or lower the fiscal deficit ratio the numerator has to also be lower.
Following from the second issue is the direction of gross borrowings that would tend to be higher this year from the Rs 6 lakh crore as was in FY16. That is so because there are repayments to be made of around Rs 2.3-2.4 lakh crore. While some may be rolled over, there is still a challenge for the RBI in particular as this amount will be daunting for the system.
Fourth, the government has to be realistic on the disinvestment target. We have so far used it as a balancing item which was put at a high of RS 70,000 cr with history revealing that we have never exceeded Rs 35000 cr. The story always plays out this way. When revenue does not increase and disinvestment receipts not realized the government has cut back on capex. This year it may not be so even as disinvestment has flopped as both tax revenue and non-tax revenue has increased. Also with oil prices coming down the benefit has been reaped by the government in terms of tax collections and savings in subsidies. Can we be twice lucky again? That is a chance we are taking.
Fifth, on an annual basis the size of the budget has been increasing by between Rs 1-1.2 lakh crore in the last few years. This being the case, the government has to account for the Pay Commission impact which was put at Rs 1 lakh crore for the coming year which is approximately this annual increase. If expenditure is going to increase in the normal course by this amount and the GDP growth will continue to be subdued, it would be a challenge again to meet the fiscal targets. Alternatively, there will be less room for discretionary expenditure.
Putting all these pieces together, it does appear that the forces working at the background will limit the ability of the government to do anything radical. The DTC and GST have set the contours for tax rates. While some changes would be invoked in both indirect taxes (especially services) and direct taxes (tax slabs or exemptions), it would not really be significant and more in the nature of tokenism which can probably enthuse the market in the short run. The task will be more of balancing the different objectives with mathematical pressures. As to deep rooted reforms that are being spoken of, one must be abstemious as there have been several policy changes invoked during the course of the year. But yes, a firm stance or reassurance on retrospective taxation will be timely in the current phase when FIIs are in an exit mode.
(The writer is Chief Economist at CARE Ratings. Views are personal)
Updated Date: Feb 23, 2016 11:44 AM